Draining the swamp?…

Greek tragedy continues…

It wasn’t the quietest of sessions, but we’re into a low voluminous week as far as overall activity is concerned. Still, we had a raft of events and data to think about. There’s trouble-at-mill in the US, with the resignation of Trump’s national security advisor and many will be pointing to a fledgling regime starting to come apart at the seams. Never mind about the uncertainty created by the raft of Executive Orders, we have uncertainty now about the longevity of the new President’s clan of appointees.

Greece just isn’t the word these days, and the sovereign is getting no breaks from anywhere. If it’s not the IMF badgering the world (or European) bail-out community, then the GDP data for Q4 didn’t help as the economy recorded a contraction in growth. No doubt the air of complacency in the markets on Greece is suggestive of a fudge to come when the next big debt payment is due. Germany will acquiesce.

The Eurozone’s growth levels for Q4 and 2016 were revised down a touch although the bright spark was provided by Italy’s economy as it expanded at its fastest rate for several years. Trump, French and domestic election jitters saw to it that the German investor confidence ZEW index recorded a fall for February. To cap it off, and as if Monte dei Paschi wasn’t a problem, we had news that a couple of banks in the Veneto region might require a state funded recapitalisation of up to €5bn. The Italian banking system’s woes has much more legs in it yet.

On the M&A front, Peugeot was in talks with GM about the merger of the French group with GM’s European Opel brand. There was little sign of any movement in spreads of Peugeot, but much head scratching as to why the beleaguered French company would want GM’s German assets? Ah, technology.

Primary delivers with a handful from Mexico…

Pemex: Mexico’s state-owned petroleum company

Day 2 and we saw €4.75bn issued in the non-financial market but from just two borrowers, Pemex and SNAM. The Mexican borrowers 3-part deal came in 4.5, 7 and 11-year maturities and, despite warnings from Fitch around the potentially unsustainable high debt burden the company carries, they still managed enough demand to lop 35-40bp of the initial guidance although they still gave around 20bp of a new issue premium versus the curve. Pemex’s order book was around €18bn and they finally printed a much more than anticipated €4.25bn!

It seems like the natives are restless and the company gave them their fill. The demand for corporate risk (in primary) is massive – and especially for IG risk where the borrower is higher beta and therefore offers a juicy pick-up. Event-risk notwithstanding higher yielding IG rated Mexican debt works for corporate bond investors.

Italian utility SNAM was back for a 5-year floater lifting €500m and was the other non-financial borrower in the session. In senior financials, Deutsche Bank was in for a quick fire €500m tap of its April 2019 FRN while Italy’s Iccrea Banca issued €600m.

After €1.55bn of IG non-financial issuance on Monday and after adding in yesterday’s Pemex effort, we’re now up at €6.3bn for the week and a much more respectable €9.85bn of primary activity for the month so far.

Yellen testimony curtails secondary activity

Equities played out in a tight range – very small up or down – pretty much across the board, as the markets awaited Yellen’s testimony. In the event, she kept the door open for a March rate hike, but it seems unlikely and May or June is the date. Still, the hawkish undertones saw to it that US Treasuries came under pressure and yields rose, the 10-year up at 2.48% (+5bp).

That helped Bund yields rise, and the 10-year was at 0.36% (+2bp) with Gilt yields rising to by the same amount to 1.31%. The Bund/OAT spread was holding at 69bp.

In the credit market, low activity as always was the mantra, but we tightened nicely in cash. IG non-financials were tighter – by a basis point as measured by the Markit iBoxx index which was marked at B+135.3bp. Usually, sterling markets follow but they didn’t yesterday. Sterling corporate credit risk valuations ended the session unchanged.

As for the high yield market, spreads tightened by 3bp on the iBoxx cash index, and returns jumped to their highest level of the year so far – rising to 1.2% at the close of business yesterday already – for 2017.

And finally, the synthetic complex saw iTraxx Main unchanged at 73bp (-1bp) and X-Over at 294bp (-1bp). Ho hum.

Have a good day.

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Suki Mann

A 25-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.